Overtime Rules in Limbo: What Businesses Should Do Now

Months ago, business owner Michael Brey had an uncomfortable conversation with seven of his employees. Based on the new overtime rules issued by the Department of Labor in May, he told them he needed to shift them to an hourly work schedule from salaried positions.

Brey, who is president and owner of Hobby Works, a 35-employee gift and hobby store in Laurel, Md., says keeping those workers salaried would have cost him as much an $35,000 under the revised regulation–roughly equivalent to adding another employee.

Now it seems those conversations were all for naught. Last Tuesday, a federal judge in Texas granted a preliminary injunction against the rule. That means a new salary threshold for overtime that would have nearly doubled to $47,476 the level that’s been in place since 2004, will not go into effect on December 1, as it was slated to do.

Any employee who earned under that amount would have been owed overtime, or time-and-a-half, for working more than 40 hours a week. The move was expected to increase wages and earnings for some 4.2 million workers, according to the DOL. Now that level will revert to the previous one of $23,600.

The sudden about-face has prompted anger and confusion on the part of small-business owners, who feel whipsawed after rushing to accommodate the new rules. Many had either increased salaries or shifted workers to hourly status, or made other decisions to try to constrain costs in the face of overtime changes.

“This is information I could have used three months ago,” Brey says. “Psychologically, it felt like a demotion [for the employees], and people were a little upset.”

Now things are likely to get even more confusing. The preliminary court injunction must first become an official injunction, which will require additional court hearings within the next 60 days, legal experts say. During that process, the Obama administration could decide to appeal the judge’s decision to the U.S. Court of Appeals for the Fifth Circuit, which would have jurisdiction for this case. (Already the DOL has said it “strongly disagrees” with the court’s decision, and is considering all of its legal options.)

Yet even on an expedited basis, an appeals court review could also take months. And while legal experts say they expect the appeals court, which reportedly tends to oppose the Obama administration, to uphold the lower court ruling, that can’t be taken as a given.

The judicial skirmishing puts small-business owners in something of a bind, says William Tarnow II, chair of the labor and employment practice group at Neal Gerber & Eisenberg in Chicago. On the one hand, small-business owners who have not taken steps to comply with the December 1 deadline need do nothing for now.

However, should a higher court rule in favor of the new overtime threshold, business owners will then need to take action to comply going forward, Tarnow says.

Business owners who have already increased salaries, or switched workers to hourly status, now face the decision of whether to keep those changes in place, or switch employees back to their previous compensation, Tarnow says.

All of this unpredictability riles business owners like Bryan Pate, the chief executive of Elliptigo, an elliptical bicycle manufacturer with 22 employees, based in San Diego. This summer, he says he sat down with two workers to explain that, due to expense, changes to overtime regulations would force him to keep them as hourly staff, rather than shift them to salaried positions.

Now that decision, and the disappointment he says it caused his workers, is also in limbo.

“This once again forces me to spend time on something that is not helping out my business at all,” Pate says. “The injunction just adds to the uncertainty of my business.”

A federal judge on Tuesday blocked an Obama administration rule to extend mandatory overtime pay to more than 4 million salaried workers from taking effect, imperiling one of the outgoing president’s signature achievements for boosting wages.

U.S. District Judge Amos Mazzant, in Sherman, Texas, agreed with 21 states and a coalition of business groups, including the U.S. Chamber of Commerce, that the rule is unlawful and granted their motion for a nationwide injunction.

The rule, issued by the Labor Department, was to take effect Dec. 1 and would have doubled to $47,500 the maximum salary a worker can earn and still be eligible for mandatory overtime pay. The new threshold would have been the first significant change in four decades.

It was expected to touch nearly every sector of the U.S. economy and have the greatest impact on nonprofit groups, retail companies, hotels and restaurants, which have many management workers whose salaries are below the new threshold.

The states and business groups claimed in lawsuits filed in September, which were later consolidated, that the drastic increase in the salary threshold was arbitrary.

On Tuesday, Mazzant, who was appointed by President Barack Obama, ruled that the federal law governing overtime does not allow the Labor Department to decide which workers are eligible based on salary levels alone.

The Fair Labor Standards Act says that employees can be exempt from overtime if they perform executive, administrative or professional duties, but the rule “creates essentially a de facto salary-only test,” Mazzant wrote in the 20-page ruling.

The states and business groups that challenged the rule applauded the decision.

Nevada Attorney General Adam Paul Laxalt said in a statement that the ruling “reinforces the importance of the rule of law and constitutional government.”

The Labor Department said it strongly disagrees with the decision. It remains confident that the entire rule is legal, and it is currently considering its options, department spokesman Jason Surbey said.

The Labor Department can appeal to the New Orleans, Louisiana-based 5th U.S. Circuit Court of Appeals, but that court has stymied the Obama administration before, blocking Obama’s executive actions on immigration in 2015.

In any case, the Labor Department could drop the appeal after Republican President-elect Donald Trump takes office in January.

In August, Trump told the website Circa that the overtime rule was an example of the type of burdensome business regulations he would seek to roll back as president, perhaps by exempting small businesses or delaying implementation.

Even if the rule survived the legal challenge, it could be upended by legislation passed by Congress or withdrawn by Trump’s Department of Labor.

U.S. Chamber of Commerce official Randy Johnson said in a statement that the rule would have been costly and disruptive to businesses.

But Ross Eisenbrey of the left-leaning Economic Policy Institute, which supported the rule, called the decision “extreme and unsupportable.”

“It is also a disappointment to millions of workers who are forced to work long hours with no extra compensation, and is a blow to those Americans who care deeply about raising wages and lessening inequality,” Eisenbrey said in a statement.

The case is Nevada v. U.S. Department of Labor, U.S. District Court for the Eastern District of Texas, No. 16-cv-731.

What You Need to Know About the New Overtime Rules

In just a few weeks, big changes are coming to the way small businesses calculate overtime for their salaried workers.

Starting Dec. 1, the salary threshold for overtime that’s been in place since 2004 will nearly double to $47,476, and it will continue to rise every three years per new regulations approved by the Department of Labor (DOL) in May. That means any employee who earns under that amount will be owed overtime, or time-and-a-half, for working more than 40 hours a week. The move is likely to increase wages and earnings for some 4.2 million workers, according to the DOL.

Yet nearly half of small-business owners are unaware of their new obligations, according to a recent survey by payroll processing company Paychex. And that’s a problem. If you don’t pay overtime wages, you can be liable for double the amount owed for all back wages, plus interest for up to three years in most states, and as much as six years in New York State.

“Small businesses in general will be very significantly impacted by these types of wage [changes],” says Tammy McCutchen, principal at law firm Littler & Mendelson. McCutchen was administrator of the wage and hour division at the DOL during the 2004 overhaul.

The DOL’s move has sparked two lawsuits by 21 states and numerous national and local business groups which challenge the regulations as an overreach of executive authority. Simultaneously, the House and Senate have both introduced legislation to delay the legislation by six months.

“It has been six months since the rules were finalized, and at the very least more time should be given to allow the affected stakeholders to comply,” says Rob Green, executive director of the National Council of Chain Restaurants, which represents large national restaurant franchises as well as small independent chains.

In the meantime, here’s what you need to know.

1. Increases. Starting Dec. 1, the salary cap for overtime will increase to $47,476, or $913 per week. The previous threshold was $23,660, or $455 a week. That means any employee who earns under the threshold will be eligible for overtime for time worked over the standard 40-hour work week.

2. Top earners get more. Some highly compensated employees who generally don’t have executive, or decision-making authority in the business will also get an increase, with their overtime threshold increasing to $134,000 from $100,000 annually.

3. More increases are coming. Although it’s the subject of two lawsuits, the salary threshold will get an update every three years. (It is currently indexed to the Census’ 40th percentile of weekly earnings in the lowest earning region of the U.S.) That means you can expect further wage hikes in 2020.

4. An important out. Businesses with revenue of less than $500,000 annually are exempt from the new rules.

What businesses can do to minimize overtime costs.

1. Raises. Increase your employees’ salaries so they earn more than the new threshold.

2. Change worker status. Turn salaried workers into hourly workers without reducing the amount of their take home pay. This is known as paying them at a cost-neutral salary rate, where you account for the overtime worked in the new hourly pay schedule.

For example, a salaried worker who typically works 50 hours a week and earns $730.77 a week, or $38,000 annually, would have a new hourly rate of $13.29, plus 10 hours of overtime at time- and-a-half. Your costs would go up about $9 annually according to McCutchen. “Instead of giving it out in salary, you pay hourly wages plus overtime wages,” she says, adding that the downside is the salary level can also be reduced if these employees work less than 40 hours.

You’ll also need to communicate clearly to formerly salaried workers that the changes are being made for cost reasons, as employees may experience the shift as a demotion, labor experts say.

3. A new contract. Come up with a new salary agreement, stipulating that salary is for up to 50 hours per week, and that you pay additional half-time pay for the extra 10 hours. That’s allowed in 44 states, McCutchen says. (The exceptions are Alaska, California, Connecticut, Hawaii, New Mexico, and Pennsylvania.) But don’t do this on your own — get legal help to make sure your agreement holds water.

Wal-Mart wmt raised salaries from $45,000 to $48,500 annually for employees including store management, spokesman Randy Hargrove said on Tuesday. The retailer did not break out the number of employees who received the raise.

The new Obama administration rule, set to take effect Dec. 1, will require employers to pay overtime to salaried workers earning less than $47,500 a year, double the current threshold of $23,660.

“We think the starting rate of $48,500 a year … would make a lot of business sense for our company,” Hargrove said.

Wal-Mart is the largest private employer in the United States and employs 1.5 million workers, which includes store staff, store management and truck drivers.

Last month, officials from 21 U.S. states filed a lawsuit claiming the new overtime rule will place a heavy burden on state budgets. The U.S. Chamber of Commerce and other business groups also filed a separate challenge to the rule in the same federal court.

Business groups have said the rule will force employers to demote some salaried management workers to hourly positions and create more part-time jobs that do not offer benefits.

Only 7% of full-time salaried employees are currently eligible for overtime pay down from 62% in 1975, according to the Department of Labor.

The Obama Administration’s New Overtime Rule Has Made 21 States Really Angry

Officials from 21 U.S. states on Tuesday filed a lawsuit claiming an Obama administration rule to extend mandatory overtime pay to more than 4 million workers will place a heavy burden on state budgets.

Hours after the states announced their lawsuit, the U.S. Chamber of Commerce and other business groups filed a separate challenge to the rule in the same federal court in Sherman, Texas.

The rule, set to take effect Dec. 1, will require employers to pay overtime to salaried workers earning less than $47,500 a year, double the current threshold of $23,660. Business groups and Republican officials say the rule will force employers to demote salaried workers to hourly positions and create more part-time jobs.

“Once again, President Obama is trying to unilaterally rewrite the law,” Texas Attorney General Ken Paxton said in a statement. “And this time, it may lead to disastrous consequences for our economy.”

Paxton and Nevada Attorney General Adam Laxalt spearheaded the states’ lawsuit, which was joined by Michigan, Wisconsin and Ohio, among others.

U.S. Labor Secretary Thomas Perez said in a statement the rule had “sound legal and policy footing” and the lawsuits were an attempt to deprive workers of fair pay. Only 7% of full-time salaried employees are currently eligible for overtime pay, he said, down from 62% in 1975.

“I look forward to vigorously defending our efforts to give more hardworking people a meaningful chance to get by,” Perez said.

Both of Tuesday’s lawsuits said the department abused its authority by increasing the salary threshold so drastically, and also failed to account for regional variations in the cost of living.

The agency also violated federal law by indexing the salary threshold to the 40th percentile of income, with automatic increases every three years, the lawsuits claim.

The states’ lawsuit says that under the rule many state employees would become eligible for overtime pay even though they perform management duties that should make them exempt.

That would force states to pay workers more or resort to layoffs and other budget cuts, a violation of states’ rights, they said.

Paxton and his predecessor, Greg Abbott, have filed a wave of challenges to Obama administration initiatives, including environmental regulations, a plan to provide relief from deportation to certain undocumented immigrants, and a rule to require employers facing union campaigns to disclose dealings with lawyers and consultants.

Managers Can No Longer Say They Didn’t Know Employees Were Working Overtime

If you have non-exempt employees reporting to you, do you know exactly how many hours they’ve been putting in? Are you sure?

“This can be more complicated than it seems, even when people punch a time clock,” says Richard Millisor, a partner in employment law firm Fisher Phillips. “In white-collar jobs, it gets even trickier.” Wage-and-hour lawsuits, already at record highs, will probably keep soaring after new federal overtime rules kick in later this year, if only because many more employees will be eligible for overtime pay.

For now, a decision from the 6th U.S. Court of Appeals in Ohio has put liability for overtime squarely on employers who “should have known”—by way of “the exercise of reasonable diligence”—whether an employee was working more than 40 hours a week. That applies even if the employee didn’t claim overtime pay for the extra hours, and even in companies with a formal no-overtime policy.

Here’s what happened: A bookkeeper hired in 2010 at a trucking company in Columbus, Ohio, often put in more than 40 hours a week. She kept detailed records of the time she worked and entered her time sheets into the company’s payroll system. However, she mistakenly thought she was ineligible for overtime, so she failed to charge the higher rate for her extra hours, getting straight hourly pay instead. This went on for several years. When she later realized her mistake, she sued the company for the overtime pay she should have put in for originally.

Her boss’s defense: He didn’t know she was working overtime. Not good enough, says the decision in Craig v. Bridges Brothers Trucking LLC (6th Cir.,No. 15-3396), noting that the bookkeeper’s “time sheets alone establish…that she is entitled to overtime.” The company’s owner said that he never saw those time sheets because, when he reviewed the weekly payroll, he looked only at a summary report that didn’t show the hours worked by individual employees. The court found that he should have used “reasonable diligence” and looked more closely at exactly who was working when.

“This case puts employers on notice that they have to be proactive about keeping precise track of people’s time,” says Millisor. For managers whose to-do lists already seem endless, he adds, “it’s one more thing not to lose sight of.” Ah, just what you needed.

Rapper T.I. Is Being Sued by Employees at His Restaurant

Scales 925, the Atlanta restaurant owned by rapper T.I., is at the center of a legal dispute.

Clifford Harris, T.I.’s legal name, and his business partner Charles Hughes have just been named in a lawsuit filed by 12 of their employees claiming that the two restaurateurs have violated the Fair Labor Standards Act, WSBTV reports. The plaintiffs have accused Hughes specifically of nefarious pay practices but, since they share joint authority in the restaurant, Harris is equally liable.

The lawsuit claims that Hughes deposited money from the restaurant’s payroll bank account into his own personal account. Subsequently when employees attempted to cash their payroll checks, they would bounce. Additionally the workers claim that they were “coerced to work off the clock for three hours before they were allowed to go home,” and they would regularly work more than 40 hours every week, but they weren’t paid overtime. When they would complain, Hughes allegedly ignored them.

What the New Overtime Rules Mean for You and Your Boss

Earlier this month, the Department of Labor outlined changes to the existing overtime exemptions.

As you are probably aware, some employees are exempt from being paid overtime, meaning their employers don’t have to pay them extra when they work over 40 hours in a week. The Fair Labor Standards Act outlines the criteria for this exemption.

Employees currently qualify for exempt status by clearing two hurdles: 1) the duties test (position is executive, administrative or professional) and 2) the salary test (worker earns at least US$455 a week or $23,660 a year).

The new rules, set to take effect on December 1, change the height of the hurdle for the salary test but do not alter the duties test. The new threshold will be $913 a week ($47,476 a year), or 40 percent of the average full-time salary in the lowest-wage census region (currently the South).

So the headline of all this is that some employees (estimated at 4.2 million) who are currently exempt from overtime because they earn at least $23,660 (but less than $47,476) will no longer be exempt.

Is this a win for workers? And a loss for employers? In truth, the real impact on both groups and the economy is much more nuanced.

What this means for an employer

To illustrate this, let’s imagine that a company employs Dennis as a lab technician.

Dennis currently earns $42,000 a year and regularly puts in 50 hours per week in the lab. The company doesn’t pay overtime for anything over 40 hours per week because he is exempt from overtime pay. He meets the following requirements: he passes the salary test by earning at least $455 a week and the duties test because he is a “professional” employee. That is, his primary duty requires advanced knowledge, in the field of science and acquired by a prolonged course of specialized intellectual instruction.

But on December 1, Dennis would no longer clear the salary hurdle. So what’s his employer to do?

The company has the following main options:

increase Dennis’ salary to $47,476 and keep him as an exempt employee,

make him a non-exempt employee and pay him $20.19 per hour ($42,000 divided by 2,080 hours per year) for the first 40 hours per week and $30.28 (1.5 x $20.19) per hour for any hour over 40 per week, or

continue to pay Dennis $20.19 per hour and limit his lab time to 40 hours.

Winners or losers?

How does this impact the company and the employee?

It depends. There are a lot of companies with exempt employees earning less than $47,467 per year. These employees, in many cases, work extended hours and carry heavy workloads. As such, for profit-maximizing companies, not having to pay overtime is rewarding.

So, a higher salary hurdle means some of these businesses will have to make a choice based on new marginal costs and benefits. That is, companies will have to identify the marginal benefit of the overtime hours currently being consumed by their employees.

At overtime wages valued at time-and-one-half, Dennis’ 10 hours would cost the company roughly $15,000 (based on his $30.28 overtime wage from the calculation above). That’s well more than double the $5,500 raise necessary to make him exempt from overtime under the new rules. That suggests increasing his salary to $47,476 would be prudent. As a result, Dennis makes more money, but, ceteris paribus (all things equal), the company has higher costs and lower profits.

This sounds awful for companies. Except that the ceteris paribus condition does not hold – not all things are constant.

When companies are forced to reexamine marginal costs and marginal benefits, the people working in these organizations (e.g., any number of my former MBA students) are likely to reexamine the way they are allocating resources and may find that Dennis has a higher return elsewhere in the organization.

Ultimately, this new salary hurdle and rule change might be exactly what the organization needs to change the way it’s thinking, to shuffle around talent or to rethink its business model. There is ample evidence, from Beyonce’s release of “Lemonade” to airlines charging crazy baggage fees, companies and entrepreneurs have shown themselves to be inventive and flexible when the market moves against them.

The big impact

House Speaker Paul Ryan and others have asserted this rule will actually hurt those it’s aimed at helping.

Although Ryan is identified as a big-thinking numbers guy, he’s not thinking big about how companies are likely to work around the final rule issued by the Department of Labor.

Consider the Dennis example above. At $42,000 per year, the company could decide that it wants to make him an hourly employee and keep Dennis working at 50 hours per week. If the company desires to keep its costs for Dennis at $42,000 per year, the company could reduce Dennis’ regular hourly wages so that his annual pay doesn’t exceed that level.

Dennis currently earns $807.69 per week. The company could pay Dennis a base wage of $14.69 (for 40 hours) and an overtime wage of $22.03 (10 hours), and he will continue to earn $807.69 (plus or minus a few cents with rounding). So the end result is pretty much as it was before, except the company will incur the costs of changing the worker’s status and filing regular and overtime wages in payroll and won’t be able to get more hours out of the employee without extra costs. For the most part, this wouldn’t hurt Dennis.

But there are likely a number of workers who are really close to the new salary hurdle (let’s say earning $45,000 per year). In these cases, it is very likely that companies will just bump up their salaries to avoid the headaches and costs of reclassifying the worker and filing straight and overtime wages in payroll.

In these cases the worker is better off, but the company might be a little worse off because of the higher payroll costs.

Then again, the company might not want to engage in the action listed above – dropping Dennis to an hourly position. The efficiency wage theory, championed by economic giants George Akerlof, Joseph Stiglitz, Carl Shapiro and Janet Yellen, suggests that companies are less likely to reduce wages if doing so might increase costs incurred by higher worker turnover, retraining new employees and the like (Alex Tabbarok writes eloquently about this here).

As such, perhaps companies will bump employees like Dennis to the new threshold but limit new hires in the future. In the end, there are few paths that would lead to workers being worse off.

A little push

In any case, companies have a lot of flexibility when dealing with changes like this and can find ways to turn them to their advantage. The impact on the economy depends on how companies and employees perceive this change and the current economic climate when the change goes into effect.

Real wages have been relatively stagnant for the last few year (4-5 percent year-over-year growth), and even in the last few years a majority of people have been convinced the economy was still in a recession. This rule change might be just the right push to start moving wages upward at a faster clip. And that might be enough to convince people that the economy is in an economic recovery.

Thomas More Smith is an associate professor in the Practice of Finance at Emory University.

The Obama Administration Just Extended Overtime Pay to 4.2 Million Salaried Workers

The Obama administration on Tuesday unveiled the final version of a long-awaited and controversial rule to extend overtime pay to 4.2 million U.S. workers, which marks one of the administration’s most significant moves to address stagnant wages.

The rule, which has drawn intense criticism from business groups and Republicans, doubles the maximum annual income a salaried worker can earn and still be automatically eligible for overtime pay from $23,660 to $47,476 and requires that threshold to be updated every three years. It takes effect Dec. 1.

Officials said many workers will earn more money, an estimated total of $12 billion over the next decade, while others will work fewer hours for the same pay.

“More than 4 million workers are either going to be paid more or get time back to raise their family, go to school  or retrain to get a better job,” Vice President Joe Biden said during a phone call with reporters on Tuesday.

The rule will likely touch nearly every sector of the U.S. economy but is expected to have the greatest impact on nonprofit groups, retail companies, hotels and restaurants, which have many management workers whose salaries are below the new threshold.

Business groups, which lobbied heavily against the changes, say companies will be forced to cut wages and hours and may slow hiring.

The Obama administration and supporters of the new rule say the $23,660 threshold allowed companies to hold down labor costs by requiring workers with relatively low incomes to work well over 40 hours per week without additional pay.

The rule will likely face legal challenges, including claims that the U.S. Labor Department flouted legal requirements for creating new regulations. Republicans in Congress have said they will move to block the rule, but they would need to overcome a veto from President Barack Obama.

The new threshold was lower than the $50,440 standard proposed by the Obama administration last year, but the last-minute change to lower it, which was widely expected, did little to appease critics.

Any federal standard above the $35,100 overtime threshold in New York, which has a high cost of living, will inhibit economic growth in more rural states in the South and Midwest, Tammy McCutchen, a Washington D.C. lawyer who works with the U.S. Chamber of Commerce, said on Tuesday before the final rule was announced.

The threshold also disappointed proponents of the new rule, including Ross Eisenbrey of the left-leaning Economic Policy Institute, who first pitched an overhaul to the White House in 2013.

“It means a million fewer employees will be helped,” he said before the rule was released.

Uber Gets Hit With Two More Lawsuits Over Driver Wages

Not surprising to anyone, ride-hailing company Uber has been hit with two more lawsuits from drivers, despite recently submitting a proposal for a $100 million settlement in two previous cases.

The new lawsuits, filed in Florida and Illinois, claim that Uber has violated the the Fair Labor Standards Act, and seek to recover unpaid overtime wages and other expenses, according to the Los Angeles Times. The Illinois lawsuit also seeks to recover tips it says Uber’s misleading messages to riders has cost drivers.

These are the first lawsuits against the company to emerge following the company’s big proposal that could have it paying a settlement up to $100 million, a big price tag, but also not that high for a company that’s raised more than $8 billion in funding. But it’s also a small price for Uber to pay to retain its drivers’ status as contractors (for now), which is fundamental to the company’s business model.

“Nearly 90 percent of drivers say the main reason they use Uber is because they love being their own boss,” a company spokesman told Fortune when asked about the new lawsuits. “As employees, drivers would have set shifts, earn a fixed hourly wage, and lose the ability to drive with other ridesharing apps—as well as the personal flexibility they most value.”

As part of the settlement proposal, Uber also said it will allow drivers to form local associations and adjust its policies around deactivating drivers. It’s also clarifying the language it uses when it comes to gratuities, to better communicate to riders that they’re allowed to tip drivers if they want to (but not through the app).

The settlement proposal only covers drivers in California and Massachusetts—the lawsuits’ home states—so it was obvious that it wasn’t going to be the end of Uber’s legal battles over this issue. “Uber has placed in motion, with its proposed $100-million settlement, a rush to the courthouse by other drivers and class-action lawyers for their piece of Uber,” employment attorney Richard Reibstein told the Times.

A $12.25 million settlement in a similar lawsuit against rival Lyft was recently rejected by a California judge, who argued it “shortchanged” drivers.